Is Yibin Tianyuan Group (SZSE:002386) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Yibin Tianyuan Group Co., Ltd. (SZSE:002386) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Yibin Tianyuan Group

How Much Debt Does Yibin Tianyuan Group Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Yibin Tianyuan Group had debt of CN¥7.36b, up from CN¥4.64b in one year. On the flip side, it has CN¥3.80b in cash leading to net debt of about CN¥3.55b.

A Look At Yibin Tianyuan Group's Liabilities

According to the last reported balance sheet, Yibin Tianyuan Group had liabilities of CN¥7.29b due within 12 months, and liabilities of CN¥3.78b due beyond 12 months. Offsetting this, it had CN¥3.80b in cash and CN¥1.31b in receivables that were due within 12 months. So it has liabilities totalling CN¥5.96b more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's CN¥5.12b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But it is Yibin Tianyuan Group's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Yibin Tianyuan Group made a loss at the EBIT level, and saw its revenue drop to CN¥18b, which is a fall of 13%. That's not what we would hope to see.

Caveat Emptor

While Yibin Tianyuan Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥232m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of CN¥1.5b over the last twelve months. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Yibin Tianyuan Group .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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